Asking for help is one thing; asking for financial help is another beast all its own. Yet many small businesses and startups turn to family and friends to help fund their company.
Many entrepreneurs bootstrap or self-finance their business. But that doesn’t mean every founder saves up their own money, opens a line of credit, or seeks a bank loan. For some, it makes sense to ask friends and family for financial support.
Tom Scarda, a business consultant who helps prospective entrepreneurs find the right franchise through FranChoice, says a lot of entrepreneurs hit up friends and family for capital.
“Most friends and family say yes to a person asking to finance a business,” he says. That is, “until it comes time to write a check.”
If you want your loved ones to buy into the business, you need to get over the awkward feelings of asking for help and convince them that you’re serious about this business and have a plan to make it successful, Scarda says.
To do so, you’ll want to follow these tips to ask friends and family for startup cash.
1. Have a solid business plan
Whether you’re asking your best friend or going to the Bank of Mom and Dad, you need to treat the discussion like you would with a banker. You wouldn’t get a bank loan without a business plan, and you shouldn’t expect your family and friends to invest in your company without one either. Your business plan should include your financials, milestones, and metrics that make it clear how you plan to make your venture profitable.
Need a little help creating a solid business plan? No problem. Check out these business plan samples, or try LivePlan, our business planning software.
2. Ask for enough money
When you’re asking friends and family to part with their hard-earned cash, your instinct is probably to ask for as little as possible, but Scarda says this is the wrong approach. If you don’t have enough money to start the business, it won’t succeed. Scarda says you need to consider three pools of money:
- Initial investment: Money needed to get the business ready for customers, also called startup costs.
- Working capital: Money needed to keep the business going until you hit your break-even point.
- Home capital: Money needed to personally survive while the business is launched. You need money to pay your own bills—don’t forget this piece! A six-month reserve is a good rule of thumb, Scarda says.
3. Make a payment plan
How do you plan to repay your family of investors? If you’re not planning to offer equity in your company in exchange for cash (a typical scenario with angel investors and venture capitalists), you’ll need to figure out a plan to pay everyone back, with interest, just like a business loan. Scarda suggests scheduling the first payment six months after the business opens.
The plan should also include “what ifs”: What if you can’t make a payment one month? What’s the plan then? By having these issues worked out ahead of time, you’ll save problems down the road. Put it all in writing, too. A legal document is best.
4. Expect investors to take an active role
The friends members and family that invest in your business may want a say in how things are done. It’s something you should discuss before raising money from people you’re close to. Investors, even if they are your parents, will want to protect their investment. Expect them to check in, ask questions about the business, and give you unsolicited advice. Don’t take it personally, Scarda says—it’s a business relationship, and you should treat it as such.
Above all else, you want to show your family that you are professional and prepared. Show them you’re ready for the big time by having all the necessary documents and by answering any questions they have. Practice your pitchbeforehand, and think through your answers to any potential objections.
All that said, there are all kinds of reasons to avoid mixing business and family as you consider your business funding options. There are plenty of pitfalls—the Young Entrepreneurs Council shared a few considerations in this article.
Tim Berry, founder of Palo Alto Software (makers of Bplans) cautions that it can be hard to get out when it’s time to walk away from a business if you’ve involved family and friends in your funding plan.
Susan Solvic says it’s important to remember that challenging personal relationships won’t magically become less complicated when you add on a new type of business relationship. However you decide to fund your business, just think through the long term consequences—both of your success, and of the potential of slower growth than you hoped.